If you’re in the dark about how much you’ll need in savings/investments for retirement, you’re not alone.

Juggling an unknown life expectancy, medical expenses, surprise big-ticket items, and being in an environment with unpredictable inflation and interest rates is a daunting task.

And most don’t have a clue how much they’ll need to survive it all – much less thrive – during their golden years.

But there may finally be a simple way to accurately estimate how much you’ll need.

It’s a one-size-fits-all system that allows you to lock in a good estimate and track your progress.

It’s called the “back of the envelope” system, and it goes like this…

Estimate what you plan to spend annually in retirement, and use that number to start.

If you have no idea, assume 80% of your current income.

We’ll use the 80% method here and assume $100,000 in income. So we’re starting with a figure of $80,000 per year in total income in retirement.

Now subtract from $80,000 whatever you estimate your Social Security benefit will be. Let’s use $35,000 per year in Social Security, leaving you $45,000.

Next, multiply that number – $45,000 – by 25.

According to the developer of this system, that’s how much you need for retirement.

For this example, you’ll need $1.125 million to maintain your current lifestyle – and you’ll need to withdraw 4% annually without running out of money.

That said, I am not completely onboard with the 4% rule.

It is a little too inflexible for me. When you consider the fact that our spending declines as we move to our later years in retirement, I would prefer to see a sliding scale that reflects that trend.

But that’s for another time.

If you haven’t yet reached your goal, and you’re still accumulating assets and cash, the rule of 72 is the best way to track your progress.

You simply divide your average rate of return into 72 to calculate how long it will take to double your money. The most commonly used rate of return for a 60% stock and 40% bond portfolio is about 5%.

(The 60/40 numbers aren’t my favorite either, but they work for this rough estimate.)

If you’re halfway to this example’s goal, about $560,000, it works out to 72/5, or 14.4 years. You will need another 14.4 years at your present rate of return to reach the $1.125 million.

You can adjust the 72 number to reflect where your savings number is now. If you’re three-quarters of the way to your goal, divide 54 (three-quarters of 72) by 5%.

Again, this is not a perfect system and is meant to be a gross estimate of how much you’ll need to maintain your current lifestyle and how long it will take to get there.

But it does offer a useful quick glimpse at the process. It’s certainly a lot better than flying blind.

Good investing,

Steve

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Source: Wealthy Retirement